State could save millions in money manager fees

Texas could save tens of millions of dollars in the next few years to benefit public school classrooms by handling more of the investments in the state’s $26-billion Permanent School Fund in-house rather than paying money managers.

The State Board of Education voted 9-5 Friday to do that, although critics warned that it could be risky.

David Bradley

After hiring 9 more people and accounting for that cost, Texas is projected to save $6 million in fees the first year and an additional $35 million over the next five years.
“That’s real money …. which goes into the classrooms,” Thomas Ratliff, R-Mt. Pleasant, said, adding “there’s always a risk in investing.”

David Bradley, R-Beaumont, tried to stall the action, although he supports the “strategic relationship” concept. Many institutional funds have already headed in that direction, he said.

But saving millions in management fees “pales in comparison to the investment risk if the program underperforms,” Bradley said.

“Let’s say this new team underperforms by a modest 1 percent in year one. Then the loss is $12 million, 2 percent is $24 million, 3 percent is $36 million,” Bradley said. “This is a public fund, Is it not our constitutional charge and our fiduciary duty to preserve and protect the fund assets, or is our mandate to provide on the job training?”

The Permanent School Fund consists of land, mineral rights and investments worth $26 billion. A portion of the fund’s earnings flows to Texas public schools each year.

Carlos Garza, R-El Paso, expressed doubt that staff could be trained to handle the investments.

“Training does not equal success. Training means training. There is no guarantee that after they are trained, there won’t be an appreciable decrease in the amount of investment money being put into it,” Garza said.

The state’s Permanent School Fund staff will enter into an arrangement with two investment firms for help. Eventually, the state could do all the investing itself.

“We currently do not have a staff capable of doing an in-house operation of this kind,” Bob Craig, R-Lubbock said. “Having a strategic relationship with two companies, we can develop that. It won’t happen overnight.

Taking on more of the investment duties in-house is not unique, Craig said. “What is unique is that we haven’t done it.”